HERB GREENBERG'S BUSINESS INSIDER -- Why Today's Market Looks So Much Like the Late 1920s / Graham & Dodd may be gone, but their lessons live on

Herb Greenberg

Published 4:00 am, Wednesday, July 16, 1997

Yesterday's item in which Seattle money manager Bill Fleckenstein said there is a "Tokyo-like mania" in many U.S. stocks prompted reader John Maiers to write: "Again with Fleckenstein? . . . Why do you persist in giving hacks who are notoriously wrong space in your column?"

Because Fleckenstein, like many contrarians quoted here, has also, at times, been notoriously right.

And because in a market like this, quotable bulls come a dime a dozen, and it never hurts to hear from the other side.

What nags at Fleckenstein and others is that many of today's investors seem to care more about a company's estimated earnings than current fundamentals.

Now in its fifth printing, it's widely regarded as the Bible of investing.

The real fun, as it applies to today, starts in Chapter 27, when the authors discuss "the New-Era Theory" of investing, which became the rage from 1927 to 1929. During that period, they wrote, two of the three basics of good investments -- a suitable and established dividend and a satisfactory backing of tangible assets -- lost nearly all of their significance. The third -- a stable and adequate earnings record -- "took on an entirely novel complexion."

According to the new-wave approach to investing, the value of a common stock depended on what it could earn in the future; good common stocks would be those that have shown a rising trend of earnings.

"These statements sound innocent and plausible," Graham & Dodd wrote. "Yet they concealed two theoretical weaknesses which could and did result in untold mischief. The first of these defects was that they abolished the fundamental distinctions between investment and speculation. The second was that they ignored the price of a stock in determining whether it was a desirable investment."

Sound familiar? Today they call it momentum investing.

And this note: If you had poured all of your money into the stocks that made up the Dow Jones average at the 1929 peak, it would have taken you 25 years to break even.

True, conditions were different back then, and the likelihood of a 25-year bear market is unlikely.

But considering that the doomed "New Era Theory" of the late 1920s is the very same style of investing that is driving the market today, this might be one history lesson you won't want to miss.

MARKET MANIA

The real driver, he says, is takeovers in which the acquiring company offers cash for the target company.

In June alone, he says, $22 billion in cash takeovers were announced. That's more than in all of 1992, 1993 and 1994 combined, and one-third the value of the number of deals completed last year.

"As long as the available supply of shares continues to shrink (as companies are acquired) and investors have to replace the shares they've tendered from a smaller supply of shares, the market can't do anything but go up."

The trend won't stop until banks make it tougher to borrow money, and that won't happen until interest rates rise.